1) Can members of a voluntary membership association of consulting
engineers ("the Association") be offered specific programs of commercial
property/casualty insurance coverage(s) including professional liability, workers'
compensation, motor vehicle physical damage and commercial property coverage? May any or
all of such coverages be offered on a group or other discounted premium basis to
Association members?

2) If a member purchases insurance through the Association and
subsequently fails to renew its membership, may the member's insurance coverage be
cancelled or non-renewed?

Conclusions:

1) Yes, the Association members may be offered the specified insurance
coverages, so long as the Association itself does not provide any services that would
require licensing by this Department (such as solicitation of insurance, adjusting of
claims, etc.) The Association members may purchase insurance under a "safety
group" or "mass merchandising" program that may result in a reduction of
the premiums they would pay for similar coverages obtained individually. The insurance may
not be written on a group basis except with regard to liability coverage, for which the
members of the Association may form a "purchasing group" to purchase coverage on
a group basis.

2) Under certain circumstances. Cancellation and non-renewal of
commercial insurance is governed by the provisions of N.Y. Ins. Law § 3426 (McKinney
Supp. 2000). Failure of a group member to renew its membership in the Association would
not be a valid basis for midterm cancellation under the statute. An insurer may non-renew
a policy at the end of the required policy period in accordance with its underwriting
guidelines, so long as it specifies the reason and such reason is not otherwise violative
of the law.

Facts:

The Department received an inquiry from a voluntary membership
association of consulting engineers ("Association"). Membership is open to all
firms that meet the licensing requirements established by New York State. Membership fees
vary based upon the characteristics of the member, with larger entities generally paying a
higher annual membership fee then smaller ones. Most, if not all, members are for-profit
enterprises.

The Association has entered discussions with a licensed insurance
broker concerning the possibility of offering Association members specific programs of
commercial property/casualty insurance coverage(s) including professional liability,
workers' compensation, motor vehicle physical damage and commercial property coverage. The
insurance program is to be written and administered through the licensed broker.

Two primary objectives of the Association are (1) to make the premium
rates attractive to members, since each member has the option to secure such coverages
individually and (2) to make the availability of such coverages a motivation for members
to maintain membership in the Association by making continued membership a requirement for
continuation of insurance coverage.

Analysis:

Prior to 1986, property/casualty insurance could not permissibly be
written in New York on a group basis. New York, responding to a property/casualty
insurance availability crisis, passed omnibus legislation (Chapters 220 and 221 of the
Laws of 1986.) One of the new sections added to the Insurance Law as part of the omnibus
legislation was N.Y. Ins. Law § 3435 (McKinney 2000), which was New Yorks first
property/casualty group insurance law. However, § 3435 permits group insurance only where
the members of the group are public entities or nonprofit organizations. Since most, if
not all, of the Association members are for-profit entities, they may not secure coverage
under a group insurance policy written pursuant to § 3435.

In response to the liability insurance availability crisis during the
1980s, the federal government enacted the Federal Liability Risk Retention Act of 1986
(LRRA), 15 U.S.C. § 3901-3906 (2001). One of the principal provisions of the LRRA was to
permit the purchase of group liability insurance, notwithstanding state laws to the
contrary, using a purchasing group as the means. New York recognized purchasing groups
when it enacted Article 59 of the New York Insurance Law in 1988 (N.Y. Ins. Law §
5901-5913 (McKinney 2000)), conforming New York law to the LRRA.

In 1989, the New York State Insurance Department promulgated a new
Regulation No. 135, N.Y. Comp. Codes R. & Regs. tit.11, § 153 (1989), establishing
standards and procedures for property/casualty insurance policies issued in New York on a
group basis (pursuant to Ins. Law § 3435 or the LRRA and Ins. Law Art. 59) or on a
"quasi group" basis. The regulation states that "'Quasi-group' means any
method of marketing individually underwritten and issued property/casualty or liability
insurance policies in a group context to participants engaged in similar activities or
organized in a common network, through a mass merchandising, safety group or similar
program, in connection with state law or a federal purchasing group." N.Y. Comp.
Codes R. & Regs. tit. 11, § 153.1(q)(1989).

Accordingly, the three alternatives that may be utilized by members of
the Association are: (1) formation of a purchasing group made up of the members of the
association that wish to purchase liability insurance; (2) development of a mass
merchandising program offering insurance to association members; or (3) formation of a
safety group consisting of members of the association. Each option must be considered
separately.

Purchasing Groups

N.Y. Ins. Law § 5902(m) (McKinney 2000), defines a purchasing group as
follows:

(m) "Purchasing group" means any group formed pursuant to the
federal liability risk retention act of 1986 which:

(1) has as one of its purposes the purchase of liability insurance on a
group basis;

(2) purchases such insurance only for its group members and only to
cover their similar or related liability exposure, as described in paragraph three of this
subsection;

(3) is composed of members whose businesses or activities are similar
or related with respect to the liability to which members are exposed by virtue of any
related, similar, or common business, trade, product, services, premises, or operations;
and

(4) is domiciled in any state.

The LRRA applies only to insurance for liability, as that term is
defined in 15 U.S.C. § 3901. Section 3901(a)(2)(B) specifically provides that liability
"does not include personal risk liability and an employer's liability with respect to
its employees other than legal liability under the Federal Employers' Liability Act (45
U.S.C. 51 et seq.)". The identical provision is contained in New York Insurance Law,
which further states, in relevant part, that "'Liability' means legal liability for
damages (including costs of defense, legal costs and fees, and other claims expenses)
because of injuries to other persons, damage to their property, or other damage or loss to
such other persons resulting from or arising out of: (1)(A) any business (whether profit
or nonprofit), trade, product, services (including professional services), premises, or
operations;. . . ." N.Y. Ins. Law § 5902(h)(2) (McKinney 2000).

Therefore, a purchasing group may purchase professional or other
liability coverage. It may not purchase workers' compensation insurance on a group basis,
since that is a form of "...employer's liability with respect to its employees. . .
." pursuant to N.Y. Ins. Law § 1113(a)(15) (McKinney 2000), and is specifically
excluded from the coverages that may be written for a New York purchasing group pursuant
to N.Y. Ins. Law § 5902(h)(2) (McKinney 2000). Nor may it secure "personal risk
liability" insurance (which includes motor vehicle physical damage coverage and first
party property insurance coverage) for its members since such coverage may not be written
for purchasing groups in New York. See N.Y. Ins. Law § 5902(h)(2) and (j)(McKinney
2000).

A purchasing group must file, with the insurance regulator of the state
where it intends to do business, a notice of the group's intention to do business in that
state. This notice must contain certain information about the purchasing group, including
the name and domicile of the insurance company that will provide the insurance coverage.
In addition, the purchasing group must register with and designate the state insurance
regulator as its agent for the purpose of receiving service of legal documents or process.
N.Y. Ins. Law § 5908 (McKinney 2000).

The Insurance Law specifies the range of activities that a purchasing
group may lawfully engage in. One authorized purpose is to purchase liability insurance
"...only for its group members. . . ." N.Y. Ins. Law § 5902(m)(2) (McKinney
2000). Based upon that provision, a member failing to maintain its membership in the
purchasing group would also lose its right to obtain insurance coverage. This result is
supported by the fact that the coverage is a form of group insurance rather than
individual coverage written for each group member. However, the failure to maintain
membership would not constitute a basis for midterm cancellation of coverage. See
N.Y. Ins. Law § 3426(c) (McKinney 2000). At the end of the required policy period or
policy term (whichever is longer) the policy could be non-renewed by the insurer and the
ex-member would not be eligible for continued coverage as part of the group. However, the
insurer could offer to provide coverage to the insured outside of the group applying its
non-group rating plan.

"Mass merchandising" means a method of marketing individually
underwritten and issued property/casualty or liability insurance policies to participants
that are employees of an employer, or members of an association or organization, that has
agreed to promote or otherwise facilitate such coverage from an insurer to such
participants, with reasonably anticipated economies of acquisition or administration.

Members of the Association could secure insurance coverage for
professional liability, workers' compensation, motor vehicle physical damage and
commercial property coverage through an approved mass merchandising program, since all are
forms of property/casualty insurance. The insurer agreeing to underwrite such a program
would need to submit a filing to the Department justifying the rate structure for each
coverage, including the economies of acquisition or administration.

The failure to maintain membership in the Association would not
constitute a ground for midterm cancellation of coverage. See N.Y. Ins. Law §
3426(c) (McKinney 2000). At the end of the policy term the insurer could, but would not be
required to, offer continued coverage. However, since the ex-Association member would lose
the benefit of any economies of acquisition or administration, the insurer would have to
apply the rating plan applicable to its non mass merchandising customers.

"Safety group" means a method of marketing individually
underwritten and issued property/casualty or liability insurance policies to participants
engaged in similar activities giving rise to similar risks, placing special emphasis on
common safety controls and risk management measures among such participants to reduce such
risks.

Members of the Association could secure insurance coverage for
professional liability, workers' compensation, motor vehicle physical damage and
commercial property coverage through an approved safety group program, since all are forms
of property/casualty insurance. The insurer agreeing to underwrite such a program would
have to submit a filing to the Department justifying the rate structure, including the
common safety controls and risk management measures among such participants that are
intended to reduce risk exposure.

The failure to maintain membership in the Association would not
constitute a ground for midterm cancellation of coverage. See N.Y. Ins. Law §
3426(c) (McKinney 2000). At the end of the policy term the insurer could, but would not be
required to, offer continued coverage. If it were established that membership in the
Association was essential to maintaining the benefit of the safety controls and risk
management measures intended to reduce risk exposure then the insurer would have to apply
the rating plan applicable to its non safety group customers.

For further information you may contact Associate Attorney Sam Wachtel
at the New York City Office.